Have You Ever Considered Treasury Bills as part of your investment Strategy?
Financial(Cash/Treasury) management is really a big deal for a HNI’s individuals/institutions. Designing a portfolio is an art. Easier than said then done, true! It really, presses all the buttons to panic as it needs acute/minute details into consideration and hours of toiling for designing a best portfolio mix. Why, because you don’t want any err. A small err can lid to whole strategy upside down.
Not everyone is bothered by it, but yes, HNI’s, financial institutions who deals into millions and trillions amount of currency, are definitely interested and hooked by it.
While going though Treasury bills I realized one basic questions which you can definitely relate too as well?
Why should I invest into Treasury bills when Fixed deposits which are as well quite similar fashioned product offers me better rates all of the time (few exception).
Here lies the solution there are different reasons/motive for different persons/organisations to be part of it! For instance, Commercial banks, financial institutions, etc., buys this more as part of the regulation governing them. They are required to maintain certain part of there funds with Government in different forms of their choice. Wealthy individuals can consider this as a one of the portfolio diversion strategy. Investing in FD’s and T-Bills have small but biggest different in terms of credit risk. Though banks are pillars of economy doesn’t collapse. Still Sovereign investments are considered purest form of risk free investment.
WHY?
Because they are backed by guarantee from the government of the country itself.
Let’s try to understand it more better from the Indian T-bills context :
- What are Treasury bills?
📗Treasury bill is a government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments.
2. What are the features of Treasury bills?
📗No interest
📗Issued at discount, difference between issue price and redemption at face value by the issuer is your gain/yield
3. Who issues it in India?
📗RBI on behalf of the Government of India
4. How it is issued?
📗Through auctions.
📗Yes you are right, auction. Details of the auction dates and results are announced on the RBI website.
5. To whom it is issued?
📗Generally, Commercial banks, scheduled UCBs, Primary Dealers (a list of Primary Dealers with their contact details is given in Annex 2), insurance companies and provident funds, who maintain funds account (current account) and securities accounts (Subsidiary General Ledger (SGL) account) with RBI, are members of this electronic platform.
📗However, with a view to encouraging wider participation and retail holding of Government securities, retail investors are allowed participation on “non-competitive” basis.
6. What is uniform price (UP) and Multiple Price (MP) which is asked for while issuance?
📗Uniform price means everyone bidding will have to pay the same price irrespective of the bid submitted by them. Anything lower than bid freeze price will be automatically rejected and anything higher than bidding price freeze will be liable to pay only freeze bidding price BY RBI in an auction result and not anything more.
📗Multiple price means everyone bidding will have to pay the price of the bid amount application submitted by them. Anything lower than bid freeze price will be automatically rejected and anything higher than bidding price freeze will be liable to pay bidding price quoted by them while application.
7. What are the types of bidding?
📗In a simple way to understand,
A. Competitive Bidding — These institutions have direct account with RBI
B. Non-Competitive Bidding — Those institutions/individuals (like you and me) who do not have direct account with RBI but submit the bid through facilitator who has the account with RBI
8. Why T-bills rather than FD’s?
📗 Please see the below comparison between the both products-
Though the returns are higher in FD’s when actually compared in 2010 and 2020, the marginal difference of return on investment varies between 0.5% -1.6% only.
9. How does I see it? Should companies, individuals consider it as part of their cash flow/treasury/financial planning?
📗Generally, it is seen that FD rates are always higher than T-bills rates (with few exception as in 2018 in India it was vice-versa)and rightly so. T-bill are sort of risk free investment in its purest form as the same is backed by the Sovereign (government of the country). It depends on your portfolio choice whether to diversify into this sort of investment. However, frankly speaking if you have ample wealth then definitely this is a sort of investment you should consider as part of your overall portfolio. They are very much liquid as well as they can be sold easily in secondary market.
📗Particularly in India, where the country is growing rapidly towards developed nation, the interest rates in future are always going to be lower than what it is now. Hence, long term G-sec securities (more sort of bonds which here is not covered) are better options for investment for surplus funds if any.
References :
1. RBI Website - https://m.rbi.org.in/Scripts/FAQView.aspx?Id=79
2. Interest rates are taken from SBI website - https://www.onlinesbi.com/
3. Below are the other various links used/glance through for the study and analysis.
https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR250758E367D62A7840A4A45F350F1429F731.PDF
https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPR1754TB0610.pdf
https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPR1795T0610.pdf
https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPR1794T0610.pdf
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11725&&Mode=0
https://www.rbi.org.in/Scripts/BS_NSDPDisplay.aspx?param=4
